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In 2026, LVMH-owned luxury travel retailer DFS will debut its most ambitious project to date: a seven-star retail and entertainment complex in China’s offshore shopping haven, Hainan.
Named DFS Yalong Bay and situated in the city of Sanya, the retailer hopes it will become the island’s top luxury destination.
It’s an important move for DFS at a critical time. The duty-free division’s sales have yet to return to the pre-Covid heights of 2019, as noted by LVMH in its Q1 results. Meanwhile, Hainan’s luxury resorts, pristine beaches and duty-free shopping continue to draw millions of visitors. In 2019, when the global pandemic essentially shut China off from the world, the island’s duty-free shopping racked up £1.97 billion in sales, reports Haikou Customs. In 2023, over 90 million tourists from the mainland visited the island, driving duty-free sales up by 25.4 per cent year-on-year to RMB 43.76 billion (£4.74 billion). With Hainan set to become a free trade port in 2025, KPMG forecasts suggest the market could exceed RMB 160 billion (£17.4 billion) next year.
However, it’s not without risk. Spending on Hainan dropped by 19 per cent year-on-year in the first quarter of the 2024 calendar year, according to Haikou Customs. New research from management consultancy Oliver Wyman pinpoints three factors behind this decline. Firstly, the reopening of international borders is luring high-spending luxury shoppers back overseas, altering the traveller demographic in Hainan to one that spends less. Secondly, last year’s government crackdown on daigou — traders who take advantage of cross-border price differences to resell luxury goods on the grey market — has curtailed growth, particularly in beauty. “While this helps restrict lower-priced travel retail products from flowing into the domestic market, it has also discouraged daigou resellers from operating in Hainan, resulting in a decline in sales since Q1 2023,” says Kenneth Chow, principal at Oliver Wyman.
Lastly, competition is intensifying elsewhere in Asia. For example, Chinese travellers can pick up a Louis Vuitton Speedy Badouliere 20 for 19 per cent cheaper in Japan versus the mainland, while some skincare items from Lancôme and Crème de La Mer are 29 per cent less. “Our forecasts indicate that approximately 20-25 per cent of Chinese luxury expenditure will be allocated overseas in 2024, an uptick from the previous year,” says Imke Wouters, partner at Oliver Wyman.
“Also, if we compare consumer spending and preferences, we see countries with a weaker currency, like Japan, are grabbing a lot of share from Hainan. If Hainan is only focusing on a price gap, it’s probably not going to be enough in this economic situation to attract Chinese travellers,” notes Chow.
In the longer term, however, Hainan’s transformation into the world’s largest free trade port — which is seeing the Chinese government ploughing millions into infrastructure such as airport expansions, high-speed roads and enhanced port facilities — is expected to significantly boost tourism. DFS is betting on Hainan to rapidly ascend as a major hub for luxury consumption, attracting both domestic and international visitors.
A superior shopping experience
Nancy Liu, president of DFS China, sees the Yalong Bay development as a core component of DFS’s long-term expansion and investment in China. The complex is set to feature over 1,000 international and luxury brands, as well as DFS’s largest beauty space to date and a VIP lounge for loyalty programme members. It will provide “unparalleled experiences” to visitors through “exceptional product offerings, services and spectacular retailtainment”, says Liu.
She underscores the importance of continually adapting to meet the needs of China’s luxury consumers, who are increasingly looking for personal and experiential connections rather than mere transactions. With 70 per cent of these consumers under 30 and Gen Z and Gen Alpha expected to dominate the market by 2030, enhancing both the experience and product discovery at Yalong Bay will be crucial, according to Liu.
DFS’s main competitor on the island, China Duty Free Group — which currently dominates with six shopping complexes — is leveraging experiences such as The L’Occitane Hotel, an interactive, immersive space where shoppers can explore the L’Occitane offer and the brand’s activities using digital tools. “Experience is a key driver for our sales at [our flagship] CDF International Duty Free Complex in Sanya. We also opened our first integrated spa space in our Global Beauty Plaza, and there are more unique experiences to come,” says Matt Liao, senior vice president of marketing, branding and public relations at China Duty Free Group.
While price advantage will always be a key reason for shopping in travel retail, both retailers and brands need to step up their efforts to create a superior shopping experience that rivals both the onshore and offshore boutique experience, says Oliver Wyman’s Chow. Travellers’ perceptions of the Hainan shopping experience are waning. “Brands and travel retailers should continue to invest in store assistant training, monitor service levels, and create a unique and differentiated brand shopping experience in order to meet the higher expectations of Chinese travelling luxury shoppers,” he suggests.
Liu agrees that to grow in Hainan, operators need to upgrade their product portfolio and elevate the retail experience. DFS’s sales in Hainan are heavily weighted towards beauty — 60-70 per cent versus under 20 per cent in Mainland China — but DFS recognises that future growth in Hainan will require a full line-up of high-end fashion, watches and jewellery brands. “Apart from LVMH, we’re also in talks with Kering, Richemont and other world-renowned brand owners, and the response has been overwhelmingly positive. We believe that this series of collaborations will greatly elevate the brand portfolio at DFS Yalong Bay,” Liu explains.
Despite near-term uncertainties in consumer confidence and the shifting landscape of luxury shopping abroad, the foundations underpinning luxury consumption in China are robust and should remain so over the long haul, says Liu. With only 13 per cent of the Chinese population holding a passport, as DFS CEO Benjamin Vuchot has declared, the domestic opportunity in China and Hainan holds “limitless potential”.
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